Editors ChoiceGlobal MarketsInternational NewsLatest NewsPersonal Finance & Investment

Cryptocurrency: The fine line between speculation and legitimate investment strategy

cryptocurrency speculation investment strategy

The explosion onto the investment scene of the phenomenon which is known as cryptocurrency left many reeling as its decentralised variation from traditional fiduciary currency set it apart from all existing asset classes.

Bitcoin began as a protocol created by an unknown individual or group working under the pseudonym of Satoshi Nakamoto; it was launched in 2009 in wake of the 2008 financial crisis. Closely following its creation, Bitcoin operated as an open-source ledger referred to as a blockchain and was utilised as a digital currency whose transactions were verified through a network of nodes and virtually impossible to trace due to its protection in cryptography. The individuals who maintained the verification network were referred to as ‘miners’ and were rewarded in Bitcoin, the world’s first cryptocurrency emulated the properties and value of gold without any actual reliance on this commodity. As well as embodying a technological revolution, Bitcoin also sought to serve a philosophical purpose. Its decentralised nature presented a libertarian, anti-establishment ideology which served as a criticism of the current fiduciary money system and its dependence on government and various other regulatory bodies.

It is believed that the origin of cryptocurrency was heavily influenced by the ‘Cypherpunk’ movement of the 1990s, where various libertarian followers projected ideas about privacy, limited government and freedom of speech. The ‘Cypherpunk Manifesto’ written by Eric Hughes proclaimed the movement’s dedication towards building anonymous systems and ensuring privacy in an open society. An idea that became realised in Nakamoto’s creation of the Bitcoin. Its revolutionary nature attracted many investors who saw potential in its concept, essentially Bitcoin’s value directly corresponded to investor sentiment. This virtually unexplored asset type was a high-risk and high pay-off investment opportunity that due to its reliance on investor sentiment was, arguably, merely based on speculation and chance.

In 2017 those who had taken a risk on this asset class experienced a huge valuation increase. Its worth reached record highs and at the conclusion of the year, a single Bitcoin equated a worth of $19,783.06. According to a study completed by University of Texas, the significant valuation increase was a direct result of market manipulation through large-volume trades that drove the price up. The limited availability of Bitcoin caused its value to surge as demand soared. It is believed that the asset is prone to sudden fluctuations in value because it is acutely vulnerable to market manipulation. The activity of a single key player or entity hugely influences the price of Bitcoin through a single transaction. Subsequently, the currency’s fall from grace in 2018, where $1,000 was retracted from bitcoin’s value in less than an hour, was considered to have been triggered by the sale of 5,000 bitcoins worth around $40 million.

Whilst the price of Bitcoin is notoriously volatile, and thus an attractive investment to those with a high-risk appetite, its susceptibility to geopolitical events and large-volume trade activity arguably makes this form of investment largely based on speculation rather than strategy.

However, Bitcoin has continued to soar past the milestone $50,000 USD price level on Tuesday and has been on the receiving end of a wave of mainstream exposure and institutional adoption. This has helped propel the Bitcoin price to new record highs and legitimised it in the eyes of a wide audience of new buyers. Similarly, crypto experts have predicted a steady increase in this value and expect it to flourish. The more that Bitcoin has been integrated amongst the mainstream investment classes and its presence on the market has become more widely acknowledged and utilised as a digital currency, the more it has shifted from an abstract ideology to a legitimate investment asset. Some advocate that the increase in demand combined with the cryptocurrency’s scarcity has vastly increased the potential value of the Bitcoin and it may grow by as much as 25-fold over the next few years.

The spawn of various other cryptocurrencies has created a new alternative and maverick investment type in this asset class of alternative digital currencies. The cycle begins again as investors with a high-risk appetite speculate as to which currencies to back before the returns are curbed by mainstream involvement.

The future of cryptocurrencies and digital currency is certainly an asset to watch, as more frequently its security and transaction speed are utilised for international transfers. Famous capital investor Tim Draper commented that, if Bitcoin appreciates as predicted, it may have “…about a 5% market share of the currency world and I think that may be understating the power of bitcoin.”

Even more recently, Elon Musk’s acquisition of $1.5 billion in Bitcoin has fuelled debate as to the wisdom of this move and whether it has consolidated Bitcoin’s status as a legitimate asset class.

1 Comment

Leave a Reply